News from Schott Financial Management

Robo vs. Real Advisor

Mar 19, 2024

Financial literacy is a skill that takes years to acquire. For those of you considering a financial advisor, you may be wondering about Robo-Advisors, and whether they are a good fit for you.

Robo-Advisors were introduced to the public in 2008 to help smaller, less wealthy individuals gain access to the world of investing. Contrary to popular belief, Robo-Advisors aren’t Robots executing trades on the floor of the New York Stock Exchange. They are technology platforms driven by algorithms that automatize investing based on a client’s personal goals, risk tolerance and finances. Robo-Advisors charge significantly lower fees than financial advisors. However, the savings you get in the short-term may under-pace account gains in the long-term, especially if you’re not actively managing the accounts.

Robo-Accounts can be set up and managed from just about anywhere that has an internet connection. Robo-Advisors have low account minimums. They determine what funds to invest in based on your answers to a Suitability Questionnaire. Suitability is a practice in the financial world that determines a client’s risk tolerance (how a client will endure the predictable ups and downs of the market), time horizon (how many years a client has to invest until retirement), and investment goals. One difference between a Robo-Advisor and a Financial Advisor is that a Robo-Advisor sends you a questionnaire to fill out. A financial advisor will meet with you face-to-face, listen to your expectations, make suggestions, and take an active role in managing your account(s).

Robo-Advising platforms are also limited. If you open an account with a Robo-Advisor, you likely will only be offered investments from a preselected batch of funds. This strategy may work well with people just starting out. However, studies have shown that investors benefit from having a well-rounded, diversified portfolio. Financial advisors also bring years of education and experience to the table. They are able to offer a variety of product choices to their clientele. Human advisors also understand the nuances and complexities of the market. They also have a fuller picture of what their clients are invested. This means if the stock market drops, your advisor can make changes that will protect your investments from a loss of capital. Of course, no capital loss can be guaranteed, as all investments carry inherent risk, however, having a human watching out for you, as opposed to a robot monitoring your accounts, can make a big difference over the long-term.

It is estimated that in 2023, $1.17 trillion dollars is under the management of Robo Advisors. Compare that with the $114.1 trillion managed by human advisors and you can see, that while AI-generated platforms are gaining ground, there’s still a long way to go. There will always be the next best thing and AI certainly has a place in the financial services industry. However, it is a tool to use to assist advisors and clients come up with a comprehensive plan for now and in the future

At Schott Financial Management, we have advising clients for 38 years. We think generationally and treat all clients like family. We also have lower-than-average account minimums and a broad selection of investments products. We understand that the young people of today will become the wealthy clients of tomorrow.

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